Managing a National Network in a Slowing Economy

Economists are increasingly acknowledging that the economy has slowed considerably. The number that now forecast a recession in the near term has doubled. (See: "More Economists See U.S. Recession Ahead, NABE Says" By Courtney Schlisserman published on Bloomberg November 19, 2007) For parcel and postal carriers in the United States this may mean an extended period of weak volumes. Already UPS and FedEx have indicated that this year's peak season will be only marginally stronger than last and the Postal Service noted that October revenue was $300 million below plan. What are the challenges to managing in this environment?

• The economic slowdown is not uniform. Not all customers, industries or geographic regions are slowing at the same rate or same time. This requires more careful attention to developing customer, industry and geographic forecasts to better plan manpower and transportation requirements. National forecasts, while useful for general trends can't help manage the costs in Phoenix or Detroit. Poor local forecasts can result in over-staffing and lower margins.
• The network does not change. Unfortunately for all carriers, while volumes stagnate nationally and shrink in some regional markets, the geography of the United States remains constant. Also while business customers may ship or receive less, they still demand service often on the same schedule as before. The challenge that carriers face is adjusting their transportation schedules between sortation centers, scheduling labor in sortation schedules and rescheduling pick-up and delivery routes to reflect lower volumes per stop.
• In shrinking markets, even labor can be a fixed expense. While all inputs can be adjusted in the long-run, carriers face the challenge of adjusting capital investment and contracting decisions that were made assuming stronger economic growth. To the extent that labor contracts restrict layoffs or re-assignments, labor becomes a fixed expense until those contracts can be changed or employees can be encouraged to retire. The Teamsters have indicated that UPS has agreed to pay the Central States Pension Fund an additional $1.5 billion to fund to allow UPS employees that participate in this plan to retire early after 30 years of employment. This could result in the retirement of as many as 3,000 of the 42,000 UPS full time employees that work in the Midwest, Great Plains and Southern States from Texas eastward and participate in this pension plan. This decision by UPS allows it to shed excess labor that would earn $28 per hour (plus benefits) under the new contract and amortize their extra retirement costs. To the extent that these employees need to be replaced now or when the economy picks up again, this decision allows UPS to reduce its operating costs as the new employees will earn $16.10 an hour.
• Contracted services require right-sizing to reflect operating realities. All carriers use contractors to provide transportation services between sortation facilities and transport mail, express, and parcels by air as well as the provision of non-core services. Carriers use both long and short-term contracts for these services. To the extent contracts for transportation and other services include payment, equipment or capacity guarantees these guarantees act as a fixed cost until the contracts expire or guarantees can be modified. Contract termination payment provisions may prevent carriers from adjusting contracted services as quickly as economic conditions require keeping excess capacity operating longer that is operationally justified.
• Slowing volumes require re-examining capital expenditures. When even common equipment such as a delivery vehicle can have a life span of twenty years, it is likely that carriers have built up excess capacity in facilities, sortation equipment, and transportation equipment. While some of the capital resources can be transferred to geographic markets that need them, others will have to sit until volumes pick up again. As such, carriers will likely delay purchases of vehicles or equipment and investments in new facilities unless the investment can have an impact in improving service, reducing costs, eliminating redundancy or replacing outmoded operating processes.
• Communication is critical. All carriers in this industry have developed strong long-term relationships with communities, employees, contractors, and customers. As slower economic activity often results in changing operations and changing networks, communication with all parties is critical to ensure that service continues to meet service standards and that employees, contractors, stakeholders and shareholders understand in a timely manner how changing economic conditions affect the firm. Communication is most critical for the Postal Service as its actions are still subject to substantial regulatory and legislative review that can slow its ability to react to changing economic conditions.